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Finnish line

When star swimmer Sun Yang climbed onto the podium to receive his gold medal at the Asian Games last month, Anta Sports was furious. That’s because Sun wore a jacket made by rival sportswear firm 361 Degrees. Anta cried foul that this contravened its exclusive sponsorship deal that the Chinese national team wear its kit (see WiC422).

The mood at Anta HQ was already a little strained after the publication of a report earlier in the summer by GMT Research. Anta’s operating margins were so high, GMT warned, that it was either the world’s best run sportswear firm or its accounting practices were dubious. No prizes for guessing which explanation it was backing.

The report was a dampener for investor sentiment. After climbing 38% during the first five-and-a-half months of the year, Anta’s stock peaked at HK$49 ($6.27) on June 13 and has fallen 30% since then.

No matter that its first half earnings beat expectations. Or that it has just announced a major new deal that could help it close the gap on Nike and Adidas to become China’s top selling sports brand.

GMT says that nine out of the sixteen Chinese sportswear companies that have listed since 2005 have turned out to be frauds, all of them from Fujian.

Their financials shared a number of characteristics, it says. One of the most obvious is a claim to be more profitable than sector leaders, such as Nike.

Anta’s bosses fired back at GMT, with chairman Ding Shizhong describing its findings as “inaccurate and misleading”. Most analysts seemed to shrug off the claims too, concluding that its profit margins are broadly in line with Nike and Adidas in China.

Investor caution about the company’s accounting practices seems to be lingering, however. The response was muted when Anta reported first half revenues up 44% year-on-year, plus a 34% rise in net profit, beating expectations.

Instead they seemed more focused on why Anta had paid suppliers up front (management said it was to lock in prices) and on another increase in the company’s cash pile. Indeed, in spite of sitting on Rmb7 billion ($1.06 billion) in cash it drew down Rmb1.2 billion in new loans. The share price dropped 10% the day after the results’ announcement.

The reason for that cash pile became clearer this month when Anta announced that it had submitted a non-binding bid for Finnish firm Amer Sports for €4.7 billion ($5.5 billion). It represents the largest outbound M&A deal by a Chinese private sector firm for more than a year, although in this case Anta is part of a consortium with private equity company, FountainVest.

Chinese investment bank CICC said the takeover will “fuel a multi-brand globalisation strategy” and is “fairly priced” at 50 times Amer’s 2017 earnings. Analysts also posited that the bid for Amer will help Anta widen the gap on its main domestic rival Li Ning, which has been concentrating on building its own brand rather than trying to develop a wider portfolio of marques.

At the end of 2017, Li Ning had a 5.3% market share in China compared to Anta’s 10.6% (across all of its brands), according to Euromonitor.

Nike and Adidas were firm leaders in the field on 20.8% and 20.1% respectively.

Amer generated about 4% of its sales in China last year, which Anta will be hoping to increase substantially with its local know-how. Amer is also positioned as a producer of premium brands, so taking it over could help Anta spruce up its image, in a not dissimilar way to that in which Volvo helped Geely, the Hong Kong Economic Journal speculated. Whether sedans and sportswear make for a good comparison is open to question, but Chinese brands have found it hard to compete with Nike and Adidas in the high-end market.

All the same, executives at the Chinese firm cannot seem to get a break from investors. The day after the bid was announced Anta’s stock plunged 10% as shareholders reacted unfavourably to the price. The Chinese consortium hopes to finalise the buyout by the end of the year, Reuters has reported.

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